Legal Considerations When Starting A New Business With Friends Or Family
It can be very exciting to start a new business. Perhaps you have started your new company with a friend or you and your spouse have started a business with another couple. Whoever your partner is, the majority of these types of small businesses are split 50/50 between the parties. You are now a 50% owner of a company and are dreaming of great success. Invariably, an argument arises between the couples which can quickly escalate where you are no longer friends let alone business partners.
At this point, both of you begin to look out for your own interests rather than what is best for the business as a whole. Without each of you looking towards your future business together, most people will try to protect any rights they have or think they may have. This can lead to one partner attempting to take existing customers to a new business they have started for only their benefit; or one partner may take funds out of the business account for himself. There are countless scenarios where one business partner is trying to hurt the other or take what they believe they are entitled to. This type of conduct will quickly bring the business to a halt or in legal terms, a deadlock.
In a business with few owners (commonly known as a “closely held business”), it is critical to have a shareholder agreement, partnership agreement or LLC operating agreement to set forth the rights, responsibilities and duties of the parties. In addition, a properly drafted agreement will help the parties resolve their disputes quietly to protect a profitable business. I frequently see profitable businesses become unprofitable because of ugly, public disputes between the owners. The owners usually engage in some sort of “tit for tat” type activity that courts construe as a breach of an owner’s duty to the company.
Sometimes, courts call this a breach of the “corporate opportunity doctrine,” and sometimes the courts call the conduct a “breach of fiduciary duty”. In either event a profitable business venture and a friendship come to an end.
If you find yourself contemplating a 50/50 ownership interest in a company, please contact one of the business lawyers at Beresford Booth to assist you prior to signing any agreement. Alternatively, if you find yourself in the middle of the dispute with a co-owner of your business, contact us to assist in the resolution of the dispute. The long-term protection of your ownership requires you to be proactive.